Navigating Retrenchment in India: How to Handle Legal Requirements and Severance Calculations?

I take care of HR for a small organization, and I am based in Malaysia. We have a branch in India, which will be closing down soon. We only have about 3 employees there. Can someone please advise me on the procedures and laws that I should be aware of in India for retrenchment? The employees are professionals, and only 1 person might be retrenched first. Should I inform any government authority just for 1 person?

Severance Calculation and Legal Requirements

The minimum severance according to IDA is 15 days for every year of service (completed). How do I calculate the 15 days? Is it 15 divided by the number of days in a month (30)? May I also know how the daily rate is calculated? His notice period is 3 months; do we need to pay on top of these 3 months?

Retrenchment Notice and Compensation Under the Industrial Disputes Act, 1947

According to the Industrial Disputes Act of 1947, if you are going to retrench an employee, you must give one month's notice if you employ more than 50 but less than 100 workers. However, if you employ more than 100 workers, then you must provide a 3-month notice, stating the reason for retrenchment.

In cases where you wish to retrench your employee promptly, you must pay in lieu of the notice period in both scenarios. If your organization employs more than 50 but less than 100 workers, you must inform the appropriate authority (Inspector/Assistant Commissioner of Labour, etc.) about the retrenchment. If you employ more than 100 workers, you must obtain prior permission from the appropriate authority.

Calculating Retrenchment Compensation

The formula for calculating retrenchment compensation is: Retrenchment compensation = (15 days average wages) x (Number of years of service). Retrenchment compensation is calculated at the rate of fifteen days' average wages for each completed year of service.

To determine the daily rate of wages, divide the total wages by the number of days worked.

Thank you so much for your advice. It's very helpful. If I understand correctly:

1. Since it is only one employee and the other two later, we do not have to inform or get permission from any authority? If we must inform or get permission, can you advise me on the website or which authority?

2. We will be giving three months' notice, but if the person stays till the end of the three months, do we still have to pay the severance payment?

3. If the severance is to be paid, the calculation is for fully completed years. Which means that if the person works half of a year, that is not calculated for that year?

4. Calculation of wages - We work from Monday to Friday. A working day is considered five days a week. Can I just use 20 days instead of calculating for the whole month? Some months have holidays.

Thank you for your assistance.

Best regards

Hi,

If any establishment employs fewer than 50 workers, the ID Act-1947 Chapter IX, which discusses lay-off, retrenchment, and closure, will not apply. Therefore, there is no need to serve a notice period or provide compensation.

With Regards,

Mr. Thumbs Up

Thank you again, Mr. Thumbs Up,

Are you saying we do not have to call it retrenchment? What should I call it then? Can you please advise me on what the procedure is? We are closing down and need to retrench one person for now.

Alright, that is understood. Do I call it retrenchment? The compensation part is fine. We only have 3 employees, and this person is an Office Manager. Should I inform the authorities?

Yours sincerely,

JA2012

Since this is a small company with only three people, you do not need government approval for retrenchment or closure. You can inform the employee that you will be closing the business. For that, you can ask the employee to resign, serve the notice period, take his settlement, and leave. You do not need to pay retrenchment compensation.

Alternatively, you can relieve him immediately by paying him the notice pay and full and final settlement of his dues. If he does not resign, you can terminate his services. In that case, as per your appointment letter, you need to pay his notice pay. If you are giving retrenchment compensation more than three months' notice pay, then you don't need to pay notice pay additionally. If retrenchment compensation is lower than notice pay, you will need to give the notice pay instead. But since the IDA section applies for 50 workers and above, no such payment is required.

A person who is a manager is not covered under the Industrial Dispute Act as he is not a worker. So for that person, you just need to follow the notice period under the appointment letter. However, he must actually be a manager, not an ordinary worker/staff just designated as a manager. This means he must be performing managerial duties such as supervisory functions, approving leaves, and deciding work allocation.

Retrenchment Under Section 25F of the Industrial Disputes Act

In this instant case, the retrenchment is governed by Section 25F of the Industrial Disputes Act, for which the number of workmen is not a criterion at all. The 50 workmen criterion applies to Sections 25C to 25E. According to Section 25F, if a workman with one year or more of service is to be retrenched, he shall be given one month's notice or pay and be paid compensation at a rate of 15 days per year of service. Additionally, a notice to the prescribed authority should also be given. If the employee is not a workman, termination depends on the terms of appointment and the state's law on shops and commercial establishment acts.

1) The provisions of the ID Act 1947 are not applicable because the number is just 3, and secondly, he is not a workman.

2) As such, you want to terminate the services of the Manager, who is not a beneficiary under the Act.

3) The confusion started from the word "Retrenchment" that you wrote. It should simply be called "termination of services."

4) The termination clause must be included in the appointment letters, and only the provisions/clauses of the Appointment Letter shall be binding to the parties.

5) If it is mentioned as 3/1 month(s) in his appointment letter, pay 3/1 months' salary as notice pay and accept his resignation. In another situation, if he refuses to resign willingly, terminate him, send a termination letter along with a DD/cheque towards all dues, including notice pay by Speed Post.

6) Please send me his Appointment letter copy for a final careful examination and to draft a termination letter for you.

Regards,

RDS Yadav

Director, Future Institute of Management and Technology

Labour Law Adviser

Email: [Email Removed For Privacy Reasons]

Mr. Yadav,

In the Industrial Disputes Act of 1947, it is mentioned that the Act is not applicable where the number of employees is three. Could you please refer to the specific section for further details?

Thank you.

My point was not in respect to workman or manager under the ID Act. I was emphasizing that the number of workmen in the industrial establishments is not a criterion for retrenching a single workman under Section 25F.